Hello, all! I’m negotiating hard on my first deal, but the lowest I can get seller is an 8.5% cap. The argument is the location for the park, which is in the Pacific Northwest, is in a location where surrounding properties are selling for much lower caps, and there is inherent value in the land itself. I believe the seller is right, and having looked at West/West Coast/Pacific Northwest properties for a long while now, they indeed seem to be listed at cap rates that are far lower than the 10+% suggested by Rolf and Dave.
So my question is: when, if ever, would you go to an 8.5% cap? Is bare land valuation a consideration? What about owner-financing? If I can get the owner to carry the paper with a low down-payment (say, 10%), would that be worth it?
A lot of west coast folks invest elsewhere for this exact reason - they do not want to be part of the low CAP rate game out west. It all depends if this meets your investment goals or not. For many it does, others not. Good luck!
Sounds like a pretty common theme for higher priced markets such as the one you’re in. A lot of seasoned investors focus less on cap rate and more on cash on cash returns. If I were you I’d set my cash on cash criteria, figure out financing options (down payment, rate, etc) and determine if his deal meets your CoC requirement.
If lot rents are below market, for example, you might find that you can buy at an 8.5 cap and within a few months have it at a 10 or 11 cap by getting to market rents with very little expense and headache to you.
Nice to have strong upside like this vs simply putting a small down payment (e.g. 10% down on seller financing) without any post-closing upside. You wouldn’t want to find yourself overleveraged in the event of a large, unexpected capital expense without much true equity in the property.
Base your decision on cash flow and the ability to increase income. If these parameters do not exist you pass. It is only and always about numbers. If the numbers do not work, regardless of what others may be settling for then you pass. You never “settle” when investing. You never settle for lower than desired returns. Don’t allow the market to determine your acceptable standards simply because your market dictates it. Keep looking, elsewhere when necessary.